Real Estate Investment Trusts: Structure, Performance, and Investment Opportunities (2024)

FAQs

What is the structure of a real estate investment trust? ›

A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool capital investors who earn dividends from real estate investments. Investors do not individually buy, manage, or finance any properties.

Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.

Investment trusts are companies in their own right, quoted on a Stock Exchange with independent boards of directors. They have a closed-ended structure, which means there is a fixed number of shares in issue, so for every buyer there has to be a seller. This structure can be an advantage.

Most real estate funds, private equity funds, venture capital funds, and other funds investing in illiquid assets are structured as closed-end funds. With closed-end, once an investment is sold, it cannot be reinvested in the fund.

REITs make money by investing the corpus into various real estate properties such as commercial properties, workspaces, malls, etc. They receive rental income from these properties, which are distributed as dividends to the unitholders. Also, they make money through capital gains by selling the assets.

What are the benefits of operating as a real estate investment trust (REIT)? A company that qualifies as a REIT generally is permitted to deduct dividends paid to stockholders from its taxable income, which reduces the amount of federal corporate-level tax the REIT is required to pay.

Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.

REITs must prioritize short-term income for investors

In exchange for more ongoing income, REITs have less to invest for future returns than a growth mutual fund or stock. “REITs are better for short-term cash flow and income versus long-term upside,” says Stivers.

REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.

Decide how you want the funds distributed, such as in a lump sum at a certain date or in specific amounts paid out at regular intervals: monthly, yearly, biennially, etc.

Are investment trusts riskier than funds? ›

Like all funds, investment trusts can rise and fall in value. However, they have more factors affecting their performance (such as supply and demand), which can mean they are more volatile and, therefore, a more risky investment.

Investment trusts can hold back income in the bad years to pay out dividends in the good years, a mechanism which has allowed some to continually raise their dividends for decades.

LLC. A limited liability company (LLC) is a common entity choice for real estate investors and offers many advantages. Choosing this structure for your real estate investment business allows you to limit your personal liability in the business to the money you contribute and the debts you co-sign for.

Limited Liability Companies (LLCs)

In fact, many experts will always recommend that real estate investors use LLCs for their real estate investments. However, whether an LLC is appropriate for your investment is still a personal decision.

In search of profits, real estate investment groups may choose to buy, renovate, sell, or finance properties. Real estate investment groups commonly buy multiunit properties, sell units to investors, and take over administration and maintenance of the property.

The two main types of REITs are equity REITs and mortgage REITs, commonly known as mREITs.

Key Differences

REITs invest directly in real estate and own, operate, or finance income-producing properties. Real estate funds typically invest in REITs and real estate-related stocks. REITs trade on major exchanges the same way stocks that do, and their prices fluctuate throughout the trading session.

A REIT will be closely held if more than 50 percent of the value of its outstanding stock is owned directly or indirectly by or for five or fewer individuals at any point during the last half of the taxable year, (this is commonly referred to as the 5/50 test).

REITs can be privately or publicly traded and are typically highly liquid since investors can buy and sell them on public exchanges or robust private markets. With a typical open-ended REIT, the trustee is responsible for buying and selling decisions, and 90% of taxable income must be distributed to the shareholders.